The paper aims to analyse the question of how cyclical fluctuations might affect long run growth. The
analysis is based on a dynamic stochastic general equilibrium model for an imperfectly competitive
economy with fully optimising agents. The model is characterized with nominal rigidities, an endogenous
technology, and multiple shocks. It predicts either a negative or positive relationship between short run
volatility and long run growth depending on the source of shocks and the reaction of the central bank. The
model also shows that, even when the negative relationship exits the policy that is designed to stabilise
short run volatility may either increase or decrease growth depending on the source of shocks.